Millionaires Dig Dirt as Czech Funds Harvest Farmland Boom

Martin Burda gave up managing $8.1 billion of securities at the Czech investment arm of Erste Group Bank AG for something that’s produced better returns than stocks and bonds: dirt.

Burda, 43, last month helped start Cesky Fond Pudy, the first investment company targeting Czech farmland. A second fund is raising money as soaring agricultural profits drive a surge in land values that contrasts with the country’s stagnant stock market and near-zero yields on government bonds.

"Czech farmland is among the least expensive in Europe and it offers a conservative investor something that’s very hard to come by these days: safety and a good yield," Burda said in an Aug. 8 interview in Prague. "Profitable farmers mean upward pressure on land prices."

Agricultural land values in the Czech Republic are rising after farming profits increased sixfold from 2009 to 2013, data from the statistics office in Prague show. The new farmland funds are predicting returns of 6 percent to 10 percent a year as consolidation of smaller plots makes land management more profitable and the gap in prices closes with wealthier neighbors like Austria and Germany.

Avant Investicni Spolecnost AS, which oversees more than 10 billion koruna ($480 million) of assets, has set up a farmland fund with a target of raising 250 million koruna, said Ondrej Pieran, a money manager at the Prague-based company. Avant predicts an annual return of about 8 percent. Burda’s fund expects to attract more than 200 million koruna of investments by October, up from 140 million koruna now.

Russia Risk

Risks to farmland investment include political actions like Russia’s decision this month to ban food imports from the European Union and the U.S. in retaliation for sanctions that had been imposed in connection with the crisis in Ukraine.

While farm purchases represent a fraction of the country’s $31 billion stock market and $64 billion of domestic government bonds, they ranked as the most attractive investment in a survey of 197 Czech and Slovak millionaires published by J&T Banka AS in June. Sovereign bonds, commodities and Czech stocks were among the least appealing, according to the poll conducted from February to April by J&T and the Perfect Crowd research company.

"It makes sense to invest in land in the Czech Republic as it’s relatively cheap and property taxes are quite low," Petr Nemecek, director of the real-estate department at Hypotecni Banka AS, the Czech mortgage unit of KBC Groep NV, said by phone on Aug. 7. "Land values are on the rise."

Long Rise

The price of Czech farmland climbed every year from 2004 to 2013, according to data compiled by Farmy.cz. The value of one hectare (2.5 acres) reached 4,596 euros in 2013, a 94 percent increase over the nine years, the appraiser and agricultural property broker said by e-mail.

Cesky Fond Pudy, which calculates values differently than Farmy.cz, puts the Czech price at 6,000 euros a hectare, compared with 7,500 euros in Poland, 24,294 euros in Germany and 35,000 euros in Austria.

The rise in Czech land values compares with a 52 percent return on government bonds and a 4.2 percent loss for the PX index of 13 stocks in the nine-year period, when the country endured two recessions and the central bank cut its benchmark interest rate to 0.05 percent. The yield on five-year sovereign notes slumped to a record-low 0.52 percent at the end of June.

"Czech bonds won’t yield anything for a long time and when interest rates start rising, holders may lose money," said Burda, who was chief executive officer of Erste Group Bank unit Investicni Spolecnost Ceske Sporitelny AS from 2009 to 2013. Erste, based in Vienna, is Austria’s largest bank.

Complicated Deals

While farm values have been largely immune to swings in the performance of other assets and the country’s economy, risks include extreme weather, land degradation and pressure from poorer nations to scrap or curb state support to farmers in developed countries, according to Burda and Pieran. They also said that buying and selling land is more complicated and takes more time than investments in bonds or stocks.

"The No. 1 risk for farmland investments would be a negative change in the EU’s agricultural policy that would hurt farmers’ profits and curb demand for land," Burda said. "But that is very unlikely to happen within our investment horizon."

While Russia is the Czech Republic’s 11th biggest agricultural export market, the ban on imports will have an almost immediate effect on domestic prices as goods flood in from Poland and other neighboring countries that also can’t sell to Russia, Pavla Hobikova, spokeswoman for the Czech unit of the Globus hypermarket chain, said by phone yesterday.

Lower Prices?

Prices, especially for dairy, fruit and vegetables, may fall 10 percent to 15 percent, said Dana Vecerova, spokeswoman for the Czech Federation of Food and Drink Industries.

This year’s grain harvest in the Czech Republic will rise 3.4 percent from 2013 to 7.1 million metric tons, according to estimates published by the statistics office today.

The Czech Republic’s relatively cheap land and fragmented market have their roots in the 1989 collapse of communism in the former Czechoslovakia and the breakup of its agricultural collectives that created thousands of small owners. The farming industry as a whole lost 2.5 billion koruna in 2003, before the Czechs joined the European Union in 2004, gaining access to its agricultural subsidies.

Czech farmers’ combined profits rose 1.8 percent last year to 16.7 billion koruna, the second-highest after a record 17.4 billion koruna in 2011, statistics office data show. The results are driven by the EU increasing payments to producers in the former communist countries.

Consolidation Prospects

"Consolidation of now highly fragmented ownership gives the fund a better position in negotiating the rental terms and boosts the future selling price," Pieran said. An increase in EU farm subsides to levels closer to western Europe may also boost values, he said.

Returns on Czech farmland are higher than they are for other real estate, where values are closer to catching up with western Europe. Prime shopping mall values in Prague, for example, were 19 percent lower than Berlin and 46 percent higher than Milan in the second quarter, according to data compiled by Jones Lang LaSalle Inc.

Growing populations of developing nations such as China and Brazil and their rising purchasing power means that demand for food is more likely to rise than drop.

"The limited supply of farmland makes it an attractive alternative to traditional financial instruments," said Avant’s Pieran. "We can’t make more land."